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Financial System and Auditing

Published on Jun 13, 2020

The Simulated Situation
You are employed as an audit senior by a firm of accountants and registered auditors. You are helping with the audit of Haxted Restaurant Ltd, a private company which owns a large seaside restaurant complex in the South East of Scotland. The year end is 30 September 2019.

Haxted Restaurant Ltd - Background information

Haxted Restaurant Ltd is a private limited company which owns a large restaurant plus a cafe and takeaway. The owners of the company are Mark and Anna who are husband and wife and have run the business together for 10 years. They have 50% of the share capital each and they are both directors of the company.
Mark is responsible for the financial side of the business and is 'front of house', whereas Anna is more involved with the day to day operational matters of the business. However, they have recently taken on two managers who are allowing Mark and Anna to spend less time in the restaurant.
The trade is very seasonal with high turnover and profits in the summer months. However, the restaurant remains open for the whole year and benefits from weekend visitors and Christmas holidaymakers. It also has an increasing local clientele.
During the summer months a large number of casual workers are taken on. Some workers only last a few days and do not return. Many are at school, college or university and are taking a holiday job. During the rest of the year there are around 15 people on the payroll. Most of these have been there for at least two years and this part of the workforce is fairly stable.
Many of the sales are cash sales, particularly in the cafe and takeaway. Purchases are bought on credit from a number of different suppliers. The company owns the premises from which the business is run.

Haxted Restaurant’s extracts from accounting systems notes

Monthly accounts and payroll
The company employs a bookkeeper for a few hours a month to prepare monthly accounts and the payroll. Both are prepared using Sage software. There is no password protection over the software.
The computer is kept in the office at the back of the restaurant. This office is also used as a rest room for staff.

Sales

Customers can pay by cash, cheque, or credit card. There is an automatic link for credit card payments. So, the amount is transferred directly into the company's bank account.
A large amount of sales is paid for in cash.
At the end of each day the tills are totaled and the money in each till is counted by one of the new managers. Sales are recorded on a daily takings sheet. A comparison is made between the amount in the tills and the amount shown on the till rolls. Although differences are noted there is little or no follow up unless there is a large difference.
On most days money from the tills is used to pay for small items. Receipts for these items are sometimes attached to the daily sheet but there is no real discipline over this.
The cheques are paid into the bank on the following day and cash is kept in a safe in the office and used to pay for purchases and wages as much as possible.

Purchases and creditors

Food orders are made by the head chef. He is also responsible for checking  deliveries to ensure that the items are in good condition and that the delivery matches the order. He signs the delivery notes as evidence that he has checked them.
Mark pays the invoices in the month following the date of the invoice. He matches the invoices to the statements received and clips them together. He notes the amount paid on the statement and states whether the payment was made by cash or cheque, giving the cheque number as appropriate.
The creditors at any one time are therefore usually one month's worth of purchases and expenses.

Payroll

Wages are paid on a fortnightly basis and are calculated from the hour sheets which the staff completes for themselves. Payments are made in cash when possible. The bookkeeper uses Sage payroll to calculate the wages but has problems in obtaining P45s, P46s, addresses, NI numbers, and dates of birth etc. for the casual staff in the summer months.
Once the bookkeeper has calculated the wages, she counts out the cash and puts it in envelopes for the staff.

Fixed assets

These are purchased by Mark and Anna as required. The bookkeeper is not reliable at posting them to the correct account and is more likely to post fixed assets to the repairs and renewals account.
The tasks that your manager would like you to complete are set out as following:

Task 1

You are planning the audit and considering which audit areas to concentrate on. Read the background information of this simulated case study.
· State audit areas which appear to have high inherent risk.
· For each area you have stated, explain the factors which lead to the high inherent risk.
· Assess the risk of fraud within this business and discuss how you could identify them
Note:  consider inherent risk only - do not refer to the accounting systems at this stage.

Task 2

You have been asked to prepare the audit program for sales. The audit objectives are to ensure that all sales are recorded and that sales have been recorded accurately.
i) Explain the following in respect to the case above:
· the tests of control
· the transactions tests; and
· the analytical procedures
They may be performed to achieve the objectives.
ii) You are considering the samples to be tested for various areas of the audit.
a) When testing any balance sheet item or profit and loss account item for understatement, state the type of population that the sample should be drawn from. Illustrate your answer by stating the population that a sample should be drawn from when testing purchases for understatement.
b) State three factors you would consider in determining any sample size, with reference to scope and materiality.

Task 3

i) Your junior has prepared a schedule of the items included in the repairs and renewals account which he thinks may be non-current assets. It is the company's policy to capitalize amounts over £100
Set out what additional audit tests you would perform to confirm that fixed assets are complete and accurate and that they exist and reassure its materiality.
ii) Mark has been talking to you about his plans for his business. He is keen to expand and is considering buying another restaurant a little further along the coast which is also a client of yours. Mark has asked your opinion on whether the other restaurant would be a good buy.
From the audit of the other restaurant you know that it is struggling to attract business, and that it is at risk from a land slip. Based on this inside information you think it may be unwise for Mark to buy it.
Set out how you would deal with this situation.

Task 4

You have completed the audit and it has been agreed that the audit report should give an unqualified opinion. Your junior cannot understand how you can do this when you have not checked all of the company's records.
(i) With reference to the wording in the `Basis of Opinion' section of the audit report, explain the assurance that is given by an audit report, and why we do not have to check everything in order to give an unqualified report.
(ii) Set out your explanation which you may stipulate in a management letter in relation to a statutory audit of Haxted Restaurant Ltd.
Ref: @ICTM
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